What do most mutual funds have that most ETFs don’t? Active management. Portfolio managers run most mutual funds, buying and selling stocks and bonds with the aim of maximizing gains and minimizing losses.
The problem is that most active managers often don’t outperform their benchmark index in the long run. That raises the question of why pay more for a mutual fund if it doesn’t beat its benchmark index that’s a lot cheaper to own?
That might help explain why five of the 10 biggest U.S. diversified stock funds tracked by Morningstar Direct are index funds, led by Vanguard Total Stock Market Index (VTSMX) with $827 billion in assets, including all shares classes.
On VTSMX (since it got mentioned)....it’s worth talking about the past decade, with a upward trend-line, and currently sells at 73.21 (would have been around 20.00 in 2009. However, the entire decade prior to that...it was mostly flat. The dividend pays near 1.70 a share. I would regard it as a ‘safe’ stock for long-term investment (more than a decade), but if you wanted a maximum safe index fund, you could probably do better. A year ago, it would have gone for 70.00, and it’s seen at least seven drops but each time (give it a month or so), it has returned, and improved.
One of my concerns with mutual funds is performance in a down market, particularly a sudden selloff. Panicked investors redeem their mutual fund shares, forcing the fund to sell off just at the moment that prices have dropped irrationally. That leads more customers to redeem, perpetuating the rout.
ETFs face somewhat the same problem, but my guess is that the ability to sell during the day spreads the damage and makes investors less likely to liquidate everything.
Is there any research on performance of mutual funds in sharply down markets versus the markets themselves? (Broad index funds likely don’t have much difference, but focused funds might).
My bias is towards holding individual securities so your fate isn’t tied to someone else’s choices.
What mutual funds have is fees. Doing ones own trading is getting close to no charge at all.